Articles Posted in Miscellaneous

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?

Published on: July 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Participants at the D.C. Bar panel on June 21 talked about whether the Jumpstart Our Business Startups Act is going to increase private placements but at a cost to public markets. The JOBS Act, which was enacted in April, facilitates the IPO process for emerging growth companies, ups the threshold for activating registration requirements, creates, under Regulation A, new exempt securities of up to $50 million, and gets rid of the general advertising and solicitation restrictions for Regulation D Rule 505 offerings.

Meantime, Attorney Tyler Gellasch, who is Sen. Carl Levin’s (D-Mich.) counsel (he was clear to articulate that his views are his own and don’t necessarily reflect the opinions of the senator), also said that he doesn’t expect there to be a lot of IPOs with this easing of rules for private offerings. He noted that while changes to Reg D Rule 506’s offerings would broaden the world of private securities, the greater threshold now provided for issuer registrations under the 1934 Securities Exchange Act has “significantly” reduced the impetus for going public.

Gellasch believes that many investors have become mistrusting of IPOs in the wake of so many of them lately not performing well upon completion of their first year. The controversies this year involving the IPOs of Facebook (FB) and BATS Global Markets Inc. haven’t helped.

He also talked about how Congress failed to perform its own cost-benefit analysis when it enacted the statute and that no extensive hearings took place about the new requirements. Among the unforeseen circumstances that have already developed are the efforts that have been made reverse merger companies to employ the on-ramp provisions to obtain a foothold in US markets.

Gellasch said that JOBS Act brings up questions that it fails to answer, such as whether the benefits that the act creates for some entities should also be given to other entities that are similar and involved in analogous circumstances. (For example, while mutual fund advertising continues to be very regulated, hedge funds are getting to avail of fewer restrictions imposed on their advertising.) He also wondered about who is now responsible for supervising Rule 506 offerings, determining whether advertisements and solicitations are accurate, and ensuring that offerings don’t turn into boiler rooms as they relate to the act’s crowdfunding provisions.

Gellasch wants to know who will now be liable for investor losses.

The JOBS Act (PDF)

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Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

NYSE Euronext Head Wants SEC to Revive Rule Proposal Enhancing Dark Pool Transparency

Published on: July 4, 2012 | by Shepherd Smith Edwards & Kantas, LLP

NYSE Euronext (NYX) CEO Duncan Niederauer wants the Securities and Exchange Commission to act on a rulemaking proposal from 2009 that seeks to improve transparency in “dark pools.” Testifying in front of a House Financial Services Committee panel, Niederauer talked about how the dramatic increase in off-exchange trading has resulted in a U.S. equity market structure that continues to become more bifurcated. During the June 20 hearing, held by the committee’s Capital Markets Subcommittee, participants looked at the U.S. equity market structure and how it affects competition and innovation.

Dark pools, which are off-exchange private trading venues that don’t show quotes to the public, are involved in about 15% of off-exchange trading. It was in 2009, even before the flash crash of May 6, 2010 that the SEC issued a proposal that would expose dark pools by making certain actionable order information subject to SEC quoting requirements. (The proposal also would substantially reduce the threshold volume that activates public display obligations for ATSs from 5% to .25%.)

At the hearing, Niederauer pressed regulators and policy makers to even matters out between alternative trading systems and exchanges, while recommending the fair distribution across all trading pools of regulatory costs. He also suggested that national exchanges be given permission to avail of lighter disclosure requirements under Regulation ATS (Alternative Trading System), which regulates non-exchange trading venues.

Should Retail Investors Be Given Greater Access to IPO Information?

Published on: June 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At a Senate Banking Subcommittee hearing last week, the topic of whether retail investors should get more access to IPO information to even out the initial public offering process for both institutional and ordinary investors was discussed. One of the reasons the hearing was called was to look at the issues involving the recent IPO of Facebook (FB), which opened on the Nasdaq a few weeks ago.

There are some who believe that the social networking giant’s underwriters gave favored clients negative material information prior to the offering while leaving other investors out in the cold. Soon after trading began, Facebook shares declined sharply. At the hearing, Securities Subcommittee chairman Sen. Jack Reed (D-RI) spoke about the need to make sure that ordinary investors and sophisticated investors are subject to the same rules, including providing everyone with access to the same disclosures and data (or, at the very least, equivalent versions of both).

Among the witnesses who support giving retail investors more access to information about IPO’s is DePaul University finance professor Ann Sherman. She suggested making issuers publish online at least two Q and A sessions from the IPO road show so that retail investors would be getting the same amount of information as the typical institutional investor that usually attends one such meeting. While she acknowledged that there are reasonable grounds for limiting how much access is given to analyst forecasts that tend to be “speculative,” she said that lawmakers should either make this data available to no one or to everyone.

SEC’s Efforts to Reconsider a ’07 Proposal Over Broker-Dealer Financial Requirements Elicits Concerns From Some Market Participants

Published on: June 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s efforts to revive a 2007 proposal, which would amend the rules under the 1934 Securities Exchange Act related to customer protection, net capital, notification, and books and records for broker-dealers, has some market participants upset. The proposal, which seeks to deal with areas of concern related to broker-dealer financial requirements and update the financial responsibility rules of these firms, was recently opened up again for comment by the SEC for a 30-day period through June 8, 2012 in the wake of the regulatory developments and economic events that have developed since 2007 and due to the public’s continued interest.

However, as our securities fraud law firm just mentioned, not everyone is welcoming this move with open arms. Earlier this month, BOK Financial Corp. (BOKF) wrote a letter to the SEC arguing that the proposal doesn’t factor in certain significant changes that have taken place since 2007 and that “key justifications” for specific proposed modifications appear to be based more on that time period rather than “current conditions.” Also voicing its disapproval was the National Investment Banking Association, which noted that the proposal fails to include numerical values or statistics that represent the present atmosphere. NIBA also pointed to the “unprecedented changes” that have followed since the proposal was introduced five years ago.

J.P. Morgan Trading Services is also not pleased with the SEC’s decision to revise this 2007 proposal. It is calling on the Commission to use other prudential rules that it believes would do a better job. Meantime, the Securities Industry and Financial Markets Association is warning that certain of the proposed requirements might up the financial osts for industry participants.

The proposal mandates that broker-dealers with the proprietary accounts of other broker-dealers maintain reserve funds to deal with claims stemming from these accounts. It also would prevent broker-dealers from including as part of these funds cash that was placed at affiliated banks, as well as some of the cash that was deposited in banks that are not affiliated.

That said, there are those that support this proposal. In a letter to the SEC, the Public Investors Arbitration Bar Association said that it believes the proposed measures would “marginally increase” broker-dealers’ financial stability while decreasing the risk of public investors that succeed in FINRA arbitration proceedings not being able to collect the damages that they are awarded through these proceedings. PIABA even believes that the proposal should additionally require that all broker-dealers have errors and omissions insurance to cover client claims to make sure that these financial firms are able to pay these arbitration awards.

Some Voice Concern at SEC Bid to Revive 2007 B-D Financial Responsibility Proposal, BNA/Bloomberg, June 18, 2012

Comments on Amendments to Financial Responsibility Rules for Broker-Dealers, SEC

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AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

Despite Reports of Customer Satisfaction, Consumer Reports Uncovers Questionable Sales Practices at Certain Financial Firms, Stockbroker Fraud Blog, January 7, 2012
FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011 Continue Reading ›

Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum

Published on: June 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At the Financial Industry Regulatory Authority’s yearly conference, the SRO’s CEO, Richard Ketchum, talked about how investment advisers and brokers that sell complex instruments to retail clients should be able to write on a “single page” the reasons why the product is in the best interest of that investor. Ketchum made his comments less than a month after FINRA fined Citigroup Inc. (C), Wells Fargo & Co. (WFC), UBS AG (UBS), and Morgan Stanley (MS) $9.1 million for their alleged failure to correctly train sales employees about the features of and risks involved with leveraged and inverse exchange-traded funds.

Shepherd Smith Edwards and Kantas, LTD, LLP Founder and FINRA Arbitration lawyer William Shepherd disagrees with this ‘single page’ approach. “Despite its name, one should know that FINRA is a self-regulatory association owned and operated by securities dealers,” he said. “A one page statement as to why an investor is being sold an investment is likely designed to become a disclaimer such as the one found on a toaster or other product. This one-pager could then be used to shift the burden of suitability from the broker to the investor. Retirees who lose their savings can then be told. ‘It is your fault, not ours.’ Beware of securities self-regulators bearing gifts.”

Ketchum also talked about how reps should talk to investors about how a product will likely do in different markets and that investment losses could result. He also suggested that broker-dealers provide more training to brokers about financial products so that they can also better explain any costs involved. Acknowledging that conflicts of interests do exist, Ketchum spoke about the need for brokerage firms to self-assess regarding which is higher priority to it: the best interests of investors or that of their own employees?

Meantime, Securities Industry and Financial Markets Association general counsel and senior managing director Ira Hammerman has spoken in favor of a uniform fiduciary standard” for both investment advisers and brokers. He said it was key that new disclosures articulate in simple English the material risks, conflicts of interest, and possible rewards.

“As for standardizing the breach of fiduciary standard in the securities industry: The goal is to water-down ‘settled law’ regarding fiduciary duty,” said Stockbroker fraud attorney William Shepherd. “Other professionals, including lawyers, have lived with this duty for centuries. Since 1945, investment advisors have existed with the current legal definition of ‘fiduciary duty.’ Wall Street brokers should simply be held to the same standard.”

FINRA Annual Conference 2012

Securities Industry and Financial Markets Association

More Blog Posts
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010 Continue Reading ›

FINRA Initiatives Addressing Market Volatility Approved by the SEC

Published on: June 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a “limit up-limit down” proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

Dire Predictions For Wall Street Reforms: Not Complete Until 2013, Even Longer to Implement, Half May Not Survive

Published on: May 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Speaking at the Council on Foreign Relations on May 2, Federal Reserve Governor Daniel K. Tarullo said he did not think that federal agencies would complete their rulemaking duties that are mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act until next year. He also said that full implementation of these rules would take even more time. Tarullo is in charge of overseeing efforts by the Fed to draft and execute these regulatory reforms.

He said that the process of completing the rules is a complicated one and challenges have inevitably arisen. To finish rulemaking duties sooner would likely have resulted in “inconsistencies and open questions” that would have inevitably led to “another round of changes.” Tarullo also spoke about how the complexities of certain US regulations have posed added challenges. For example, regulatory reforms must conform to the Basel Committee on Banking Supervision’s Basel III framework.

Tarullo also said that “instability” from the shadow banking system warrants a need for more regulatory reforms. He warned of new forms of shadow banking that could be lurking on the horizon especially if greater regulation of the large financial firms leads to elements of the shadow banking system going into “largely unregulated markets.”

As the US House Passes Package of Bills to Open Capital Market Flow to Small Businesses, the Senate Prepares Similar Legislation

Published on: March 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

It’s been less than one week since US House passed a package of six bills that would open up capital flow to small businesses. Now, it is the Senate is preparing to introduce its own version of legislation to assist small businesses in raising capital. Both Republican and Democrat senators are expected to work together to push forward the bills package, which would ease up the restrictions of SEC regulations to attract investors and help out startups and small businesses.

The legislation, which made it through the House by a 390-23 vote, has President Barack Obama’s support. Called the Jumpstart Our Business Startups Act (H.R. 3606), the bills would allow crowdfunding (this involves raising capital from a bigger pool of small-scale investors that the Commission has not classified as “accredited.”), increase the shareholder reporting trigger for all community banks and companies, set up an initial public offering “on-ramp” for emerging growth companies, increase the Regulation A offering cap to $50 million, and eliminate the general solicitation ban.

The House also approved several amendments to the package. Among these was one that would up the shareholder threshold for all firms to $2,000. The original bill had only increased the threshold to 1,000. Per the amendment, only 500 shareholders under the 2,000 limit can be non-accredited. Another amendment mandates that the Securities and Exchange Commission conduct a study regarding whether it can enforce the Exchange Act’s Rule 12g5-1.

SIPC Modernization Task Force Recommends Increasing SIPA Protection Level for Failed Brokerage Firm’s Clients from $500K to $1.3M

Published on: March 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SIPC Modernization Task Force, which was created by the Securities Investor Protection Corporation, has made 15 recommendations to update SIPC and Securities Investor Protection Act provisions. Among the 15 recommendations:

• Raising coverage protection for customers of failed brokerage firms from $500K to $1.3M.
• Getting rid of the distinction between protection levels for securities and cash.
• Providing pension fund protections for participants on a pass-through basis.
• Amending the current minimum assessment to whichever is greater-a) the amount established by SIPC Bylaw to not go over 0.2% of the member’s gross revenues from the securities business or b)$1,000.
• When total amount of claims aggregates is $5 million, allowing for direct payment procedures.
• Mandating that SIPC members’ auditors submit audit report copies with SIPC.
• Affirming banks and other custodians’ duty to protect Rule 15c3-3 accounts; reaffirming that the accounts will have to contend with trustee control should the broker-dealer enter liquidation proceedings.
• Granting the same avoidance powers to the SIPA trustee and a trustee dealing with a case under the bankruptcy code.
• Continuing to allow reverse purchase agreement and repurchase related claims to be treated as general creditor claims.

SIPC’s board is now evaluating the recommendations, some of which will require congressional action (ie. rule making).

Meantime, investors of Bernie Madoff have submitted two petitions requesting that the US Supreme Court review the U.S. Court of Appeals for the Second Circuit’s ruling, which upheld Irving Picard’s method of calculating “net equity” under SIPA in which customers are allowed to get back their “net equity.” However, how that amount is calculated is not specified.

Picard is the Madoff trustee and is overseeing the liquidation of the Ponzi mastermind’s brokerage firm, Bernard L. Madoff Investment Securities LLC. Contending that BLMIS created false profits, Picard Is suing “net winners” that allegedly took more money than they deposited into their accounts. The money retrieved would pay back “net losers.”

In a certiorari petition submitted on February 3, lawyers for hundreds of investors contended that the appeals court made a mistake in giving SIPA trustees “unlimited discretion” to determine “net equity” according to whatever circumstances are involved. The investors argued that SIPA defines “net equity” in a manner that mandates that SIPC insurance coverage be issued according to the amount the broker owes to customers. This figure the reflected on the last statement.

A few days later, Massachusetts School of Law Dean Lawrence Vevel, who is also an investor, filed his certiorari petition accusing the Second Circuit of disregarding congressional intent when it upheld in favor of Picard’s approach to “net equity.” He argued that Congress obviously meant to replace client securities even if the securities had never been bought.

The Madoff trustee has refused to pay back claimants according to their final BLMIS accounts. Instead, he has said that customer claims have to be based on the withdrawals and deposits that are noted in BLMIS’ books and records.

Diverse Group of Securities Experts Make Recommendations For Future of Organization, SIPC, February 21, 2012
Madoff Investors Ask High Court to Review Affirmance of Trustee’s ‘Net Equity’ Method, Bloomberg BNA, February 22, 2012

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FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012
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Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms

Published on: March 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission’s Division of Trading and Market Associate Director David Shillman reported that the staff is almost ready to recommend three market rules for adoption. He noted that the Commission would likely bundle recommendations dealing with consolidated audit trail, market-wide circuit breaker changes, and limit up-limit down mechanisms. Schillman made his comments at SEC Speaks, which was sponsored by the Practising Law Institute, on February 24.

FINRA and the national securities exchanges submitted the proposal on limit up-limit down last year. Per the proposal, trades in listed securities would need to be executed within a range connected to recent instrument prices. The limits are set up to take the place of single stock circuit breakers (pilot basis-approval was given). Shillman noted that although single stock circuit breakers “have worked relatively well,” they are a “relatively blunt instrument” and a wrong trade can happen prior to the break’s activation. Such mistakes would be avoided with limit up-limit-down.

The exchanges and FINRA also proposed to update current market-wide circuit breakers, which would tighten the trigger-window for a market-wide stoppage to a 7% index from a 10% price movement. The pause that occurs in trading would also be shortened. Meantime, in 2010, the SEC had proposed a “consolidated audit trail,” which would be a national database for capturing in real time details on the National Market System securities and listed options. The customer’s identity would be included in the data.